By: Tom Nowak, Principal
The change to a Democratic Presidency and a Democratic-controlled House and Senate as a result of the elections leads to speculation on tax law changes on the horizon. President Biden mentioned on the campaign trail many tax initiatives he would prefer to see, but the timeline for such reform appears likely to be delayed until late 2021 or early 2022. Retroactive application seems unlikely due to higher priority items, such as the pandemic and economic recovery.
A summary of important changes proposed on the campaign trail are as follows:
- Potential shrinking of tax brackets and increases to the highest marginal tax rate to 39.6% for income over $470,700 vs. the 2020 top rate of 37% for income over $518,401.
- Capital gains tax rates potentially changing to ordinary income (taxpayers with income over $1 million) and potentially subject to the top tax rate, vs. 2020 varied rates at 0%, 15% and 20% based on income.
- Increases in the Social Security tax with a 12.4% additional tax on persons making more than $400,000 to be split between the business and the individual (individual paying both if self-employed).
- Potential increased benefits and incentives for retirement contributions, with a proposed refundable credit estimated to be at the 26% rate.
- Further limitations on itemized deductions such as reenactment of the Pease limitations; limits to overall deductibility of itemized deductions to 28%; restoration of state tax deductions (removing the current $10,000 limit) and potential changes to the increased standard deduction amounts have all been discussed by the Biden administration.
- Credit enhancements for taxable incomes under $400,000 for child tax credits; dependent care credits; renter credits; first-time homebuyers and earned income credits.
- Estate tax increases by a decrease in the lifetime exemption to $3.5 million (currently $11.7 million, with sunset to $5.5 million at end of 2025); repeal the basis step-up currently allowed and increase the tax rate to 45%.
- Changes to the current IRC Sec. 199A Qualified Business Income (QBI) that would phase out for those taxpayers with income over $400,000.
- Increase the corporate tax rate from 21% to 28%.
- A 10% offshoring penalty on corporations that produce overseas to sell back to the U.S. to deter overseas manufacturing and bring jobs back to the U.S.
- A new Made in America Tax Credit which includes a 10% advanceable tax credit.
- Creation of a 15% minimum tax on all corporations with book profit (not taxable income) of $100 million or higher.
- The expansion of the Employee Retention Credit (ERC) currently set to expire on June 30, 2021.
- Health and Safety Credits.
- Potential increases in the minimum wage.
If you feel the overall tax landscape is going to result in an increase in rates and overall taxes in 2021 or 2022, it may be prudent to consider accelerating income in 2020 at the lower rates.
Planning items to consider as 2020 income tax returns are prepared:
- Extend your return to buy yourself some time and see what occurs with legislation during 2021. Pause filing until the fall of 2021 to take advantage of depreciation decisions and tax rate adjustments if more is known by the extended filing deadline.
- Typical advice from an accountant is to defer income and accelerate deductions to reduce taxes in most years; however, in light of the potential changes, accelerating income and not taking accelerated deductions in 2020 while the rates are lower will allow the deductions to extend into 2021 and beyond.
- Manage your 2020 bonus depreciation, Section 179 deductions, and cost segregation applications in 2020. Defer taking these until future years when rates may be higher.
- Manage capital gains and installment sales in anticipation of increased capital gain rates or overall removal of preferred rates.
- Manage your retirement fund contributions based on timing and credits available with potential changes.
- Review your estate and gifting plans for optimization with potential new laws. Have you already planned and discussed portability? Does your estate become taxable under the lower exemption amounts proposed to create a proactive planning opportunity before legislation changes?
Our advice is to carefully consider the potential tax changes now and consult with your tax advisor to maximize planning for prospective 2021 tax legislation while preparing your 2020 tax returns. Being aware of what changes are being considered, and proactively planning for them, will help prevent any surprises should they come to fruition.
Hear more about potential tax law changes in our webinar entitled The Biden Administration Tax Plan – What We Know Today. You can download a recording of the webinar and the presentation here.
If you have any questions, please contact your Blue & Co., LLC advisor, or feel free to contact the author: